Opinion: Infrastructure Gets Much-Need Thrust from Budget

(Samir Kanabar is a tax partner at EY)

Budget 2014 clearly recognizes infrastructure as a new growth engine; it requires big time capital investment and generates employment as well as revenues over next 20 plus years. The sector has been reeling under stress for past 2-3 years for various reasons like over-leverage, environment clearance, land acquisition etc.

Though the expectations were to set a framework and remove the bottlenecks under various regulations, clearances, Budget 2014 has been able to formulate and commit towards taking the first step. The Finance Minister in his speech has announced various policy measures some of which are mentioned below.

Shipping and port sectors was not given due importance since past 3 years. Budget 2014 and railway budget has realised the importance of the sector and has pronounced several measures which include comprehensive policy on Indian controlled tonnage, improve the waterway connectivity by proposing national waterways, setting up of 16 new ports and infuse funds for development of SEZs. These alterations would not only help in generating employment but also aid in reduction in the logistic costs and boost revenues. Of course measures relating to taxation of seafarers, zero rating EXIM shipping services, rationalization of tariff policy for major ports and several other measures still remaining high dry. We hope that the next budget addresses these issues.

The Finance Minister has given a big sigh of relief to the power sector by extending of tax holiday for power sector up to March 2017. The critical and long awaiting move providing linking of coals to the power plants would help in reviving the dead investment in power plants of various companies. It has also been proposed to provide measures to ensure enhancement of domestic coal production supplied to coal based power plants.

Introduction of ultra-mega solar power projects in the northern, western and southern states of the country should assist in saving scarce resource and result in increased usage of solar energy. Further, the proposed launch of the new scheme for ultra-modern critical coal based thermal power technology could result in an efficient usage of coal.

Providing the tax mechanism for taxation of Infrastructure Investment Trusts (IIT), a cash pooling mechanism has been welcomed and the industry would hope to resolve the financial disability in sector, by introduction of such vehicles for raising finance. Basis past experience, this new scheme will have some teething problems and tax issues which will have to be represented for smooth implementation. It would be important to see the final regulations on the IIT (to be announced by SEBI) and clarifications under FEMA. Given the alternate options of infrastructure debt fund and overseas business trust schemes, fixed return investors will have one more option in the form of IIT.

Various customs and excise duty exemptions have been granted on raw materials, parts, machinery and equipment used by solar and wind energy plants thereby providing a boost to the renewable energy sector. Five per cent concessional BCD and full excise duty exemption has been granted on machinery required for initial setting up of compressed biogas plant.

A clarification has been issued that road construction machinery imported duty free can be sold within 5 years on payment of customs duty on depreciated value and that individual constituents of the consortium whose names appear in the contract can import goods duty free. For availing customs duty exemption on goods required for construction of roads, certification requirement from regulatory authorities has been removed.

Effective service tax rate on works contracts involving maintenance, repair, completion and finishing services has been increased from 7.42 per cent to 8.65 per cent.

Due to the longer gestation period, infrastructure projects erstwhile being not coupled with longer tenure loans resulted in financial crunch. This undue hardship has been resolved by the Government through encouraging banks to extend long term loans to infrastructure sector with flexible structuring to absorb potential adverse contingencies.

Although the government has proposed bold steps to provide growth to infrastructure industry there are various other buried and untouched aspects which would need government's prompt attention for encouraging perpetual progression. Aspects such as deletion of MAT for infrastructure sector, revival of stalled infrastructure projects, single window clearances infra projects are some of them.

Budget 2014 could be said as a visionary budget, which lays down a robust platform for promoting the infrastructure development to the wobbly economy. The above measures will not only boost the sector but also build hopes with more to come in future. We anticipate that more fuel by way of reforms will be announced to accelerate engine infrastructure.

(Himanshu Doshi, senior tax professional at EY, also contributed to the article)

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